My opinions on value investing. The idea is to create a value discussion on stocks and concepts. You might find this blog leaning a bit towards Dalal Street but the concepts should travel well across global markets.
Please note that I may or may not have a position in these stocks. Please use these opinions after through independent research and at your own risk.

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Sunday, January 18, 2015

NIFTY Price to Earnings (PE) - Overheated yet?

This question really does not belong in the value investing folklore but is a proxy for me to judge whether the markets are overheated and how dangerous mistakes can be. In high index P/E environments anyone is likely to be swayed by exuberant growth statistics. I typically like to use NIFTY as the index of choice for my research as it is the leading index on Dalal Street. Yes, some can argue that the Sensex is the leading index on Dalal Street but I think the NIFTY is more practical and covers a larger and more apt section of the market.

The 12.5 percentile has not been hit since March 2009 - which shows an extended period of exuberance - which maybe not that irrational considering the new vigor towards development.

The current level is hovering around the 75 percentile mark. Over which only in highly maniacal markets has the index stayed above it:

2000 Dot com boom (before the bust)

2007-08 global financial exuberance before the bust

2009-11 when the GDP numbers in India did not fall as fast as the global numbers so everyone though India was "immune" to the global financial system

The 87.5 Percentile has only been breached for short periods (max 5 months) at the culmination of the aforementioned booms before the busts. Will this rally hit the 87.5 percentile limit? India's most fabled investor and trader Rakesh Jhunjhunwala definitely thought so back in May 2014 when he said this will be the "mother of all bull markets"